PART 1 | Designing Performance Incentives Programs: Differentiating Incentives from Salary, Commission, and Benefits

January 31, 2018 | Thought Pieces

Designing-Performance-Incentives-Programs

To kick off this three-part series on designing performance incentives programs, Deirdre Conde, Product Head of our motivation platform, talks about the building blocks of rewards packages and how each is different from the others.

The research surrounding the Reward aspect of the Effort-Performance-Reward model of motivation is bountiful, and it is rightfully so. The scope of rewarding covers not just the how and the when of giving rewards, but also the what. In one of our whitepapers, we’ve even discussed the many components of standard rewards packages: base pay, performance reward, profit reward, skill-based pay adjustment, real pay adjustment, service reward, sacrifice reward, nonwork award, and non-economic award.

Newstrom

For less complex organizations, the model (from Newstrom, 2011) may seem daunting, and honestly, a bit too much to put into a rewards package. Some might even ask: isn’t salary enough? We’ve explained our stance on this before through Herzberg’s Two-Factor theory, where we explored how benefits exist to increase employee satisfaction and how incentives are in place to improve employee motivation

However, we agree that the model may be too elaborate for most to apply with ease. In a theoretical sense, this is how HR practitioners see rewards packages. But because we know that employees don’t perceive their packages that way, we simplify this model when we analyze our clients’ reward structures. We formed four general components: benefits, salary, commission, and incentives.

Rewards-Package-Design

Salary

At the base of the model is still plainly what employees receive through the payroll: cash. Base pay, adjustments, and increases conceptually fall under salary. What it’s called explains what it does: it compensates employees for their time, skills, and experience. In practice, this is a fixed amount that is given with a fixed schedule.

Benefits

On top of compensation are benefits which supplement the economic role that salary plays. Vacation time, health plans, and allowances are examples of non-economic rewards given to employees as a fixed component of the rewards package. Note that when we say that a component is fixed, we mean that they are given independent of employee performance or effort. Salary and benefits are rewards that employees can expect to receive simply because of their employment status.

Commission

On the other hand, commission is dependent on employee effort. In the original model, this is referred to as profit reward. In organizations, this is applied by giving employees their individual share of a sale or deal closed. The variability of this component of the rewards package is instrumental in allowing desirable work behavior to persist throughout employment.

Incentives

Another variable component of the rewards package is dependent on employee performance. Hence called performance rewards in Newstrom’s model. When we discussed the Effort-Performance-Reward model of motivation, we defined performance as the achievement of any outcome that impacts the company positively.

This can be interpreted in a wide number of ways: the successful referral of a candidate for employment results in a positive organizational outcome just as much as exceeding the quota for a sales channel does. What they have in common though is that neither follow a predictable schedule of rewarding if the performance prerequisites aren’t met.

Incentives, like benefits, may be non-economic in nature. Unlike with salary and commission, which are always (if not, almost always) given in cash, organizations have more leeway in crafting and optimizing in kind incentives and benefits programs.

Ironically, with salary and benefits being fixed rewards, they’re the ones that call for a more individualized design while commission and incentives have clear sets of rules and mechanics that determine reward form and size despite being variable rewards.

With these similarities and differences, it’s important to note that each of the four general components serve its own purpose in rewarding and supplementing the employment itself, the efforts that help sustain it, and the performance that results from those efforts. If the lines are blurred between them, then the merits they provide and the roles they play in satisfying and motivating employees get lost along the way to employees. Commission tends to be seen as part of salary in some organizations, and bonuses are taken as cash benefits instead of as incentives. This misunderstanding undermines the earning part of the equation, and prerequisites like Effort and Performance are forgotten.

This is a common problem with performance incentives programs. When the reward strays from its variable and non-economical nature, its motivational power is also defeated. This is why, like the other components, they have to be designed more thoughtfully. Try reviewing incentives in your organization:

  • Check if the rewards forms they take are easily distinguishable from the rewards form of salary, benefits, and commission — if they all take the same form of cash, how do employees know the difference?
  • Plot out the rewarding schedule and focus on where they coincide — which component is it that employees look forward to? What gets overshadowed?
  • Assess whether employees understand the reason for the reward — is it crystal clear to them what it was that they did to merit the reward?

Incentives have their own role to play in motivating employees, and we hope that we’ve established that they’re different from the other components of the full rewards package because they’re given to reward performance. In the next part of the series, we’ll dive deeper into how the operational definition of performance is critical in designing incentives programs for your company.

Reference:

Newstrom, J.W. (2011). Organizational Behavior: Human Behavior at Work (13th ed.).

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Deirdre Conde is the Product Head of STORM Technologies’ incentives platform. She is a psychometrician who dabbles in human resources, marketing, and user experience design.


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